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Foreign Direct Investment and Growth in Transition Economies

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  • Aleksynska, Mariya
  • Gaisford, James
  • Kerr, William

Abstract

Recent studies of developing countries have suggested that the effectiveness of foreign direct investment (FDI) as spur to econo mic growth depends on the availability of "human capital" or skilled labour in a host country. In other words, it is primarily the synergy between FDI and human capital — rather than FDI itself — that acts as a strong stimulant to growth. Since many transition economies such as Ukraine have abundant human capital, this implies that policies that encourage FDI may be very beneficial in facilitating economic restructuring and stimulating growth. This paper provides a thorough empirical investigation of this issue by examining the experience of Ukraine and other transitional economies. The paper provides an overview of Ukraine’s experience with FDI and growth before systematically analyzing the connection between these variables for a panel of transition economies. While the paper finds deficiencies in earlier work examining the synergy between FDI and human capital, it finds interesting evidence that is consistent with the synergy hypothesis for transition economies. Further, the analysis also suggests that there is a complementary — rather than substitute — relationship between FDI and domestic investment. Thus, the presence of FDI may provide new learning opportunities for those making domestic investments and visa versa. The possibility that it is not large flows of FDI that cause high economic growth rates, but strong growth that acts as a magnet for FDI is also investigated. While the paper shows that there is little empirical evidence of such reverse causation in transition economies, it also reveals that there is little evidence that FDI stimulates economic growth beyond the current year. This lack of persistence in the benefits of FDI in transition economies suggests that there may be room for policy initiatives to increase the efficacy of FDI.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 7668.

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Date of creation: Jun 2003
Date of revision: Dec 2003
Handle: RePEc:pra:mprapa:7668

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Related research

Keywords: foreign direct investment; spillovers from FDI; human capital complementarities; transition economies; growth;

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References

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  1. Robert J. Barro, 1989. "Economic Growth in a Cross Section of Countries," NBER Working Papers 3120, National Bureau of Economic Research, Inc.
  2. Borensztein, E. & De Gregorio, J. & Lee, J-W., 1998. "How does foreign direct investment affect economic growth?1," Journal of International Economics, Elsevier, vol. 45(1), pages 115-135, June.
  3. Magnus Blomstrom & Ari Kokko, 2003. "The Economics of Foreign Direct Investment Incentives," NBER Working Papers 9489, National Bureau of Economic Research, Inc.
  4. Robert C. Feenstra & James R. Markusen, 1992. "Accounting for Growth With New Inputs," NBER Working Papers 4114, National Bureau of Economic Research, Inc.
  5. Stanley Fischer & Ratna Sahay, 2000. "The Transition Economies After Ten Years," NBER Working Papers 7664, National Bureau of Economic Research, Inc.
  6. de Mello, Luiz R, Jr, 1999. "Foreign Direct Investment-Led Growth: Evidence from Time Series and Panel Data," Oxford Economic Papers, Oxford University Press, vol. 51(1), pages 133-51, January.
  7. N. Gregory Mankiw & David Romer & David N. Weil, 1990. "A Contribution to the Empirics of Economic Growth," NBER Working Papers 3541, National Bureau of Economic Research, Inc.
  8. Pietro Garibaldi & Nada Mora & Ratna Sahay & Jeromin Zettelmeyer, 2001. "What Moves Capital to Transition Economies?," IMF Staff Papers, Palgrave Macmillan, vol. 48(4), pages 6.
  9. Campos, Nauro F & Kinoshita, Yuko, 2002. "Foreign Direct Investment as Technology Transferred: Some Panel Evidence from the Transition Economies," Manchester School, University of Manchester, vol. 70(3), pages 398-419, June.
  10. V N Balasubramanyam & M Salisu & David Sapsford., . "Foreign Direct Investment and Growth in EP and IS Countries," Working Papers ec18/94, Department of Economics, University of Lancaster.
  11. Ricardo Hausmann & Eduardo Fernández-Arias, 2000. "Foreign Direct Investment: Good Cholesterol?," IDB Publications 6466, Inter-American Development Bank.
  12. Jonathan Temple, 1999. "The New Growth Evidence," Journal of Economic Literature, American Economic Association, vol. 37(1), pages 112-156, March.
  13. Peter Kennedy, 2003. "A Guide to Econometrics, 5th Edition," MIT Press Books, The MIT Press, edition 5, volume 1, number 026261183x, December.
  14. Blomstrom, Magnus & Kokko, Ari, 1998. " Multinational Corporations and Spillovers," Journal of Economic Surveys, Wiley Blackwell, vol. 12(3), pages 247-77, July.
  15. Stanley Fischer & Ratna Sahay, 2000. "The Transition Economies After Ten Years," IMF Working Papers 00/30, International Monetary Fund.
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